Benefits Of A 1031 Exchange

Don't sell your income or investment property until you Do the Math

Taxes are paid on capital gain, not equity or profit. It is possible to sell property
without realizing much profit and still owe substantial capital gains tax. Capital
gain is simply the difference between the sales price and the adjusted basis (i.e.,
what you paid for the property, plus amounts spent on capital improvements, less
depreciation taken) less any closing costs associated with the sale.

The formula set forth above is provided to help you determine your approximate gain
and the sums that you may wish to defer through your exchange transaction. Consult
with your tax advisor to determine the correct values and whether an exchange is
appropriate for your circumstances.

100% Deferral

To fully defer state and federal capital gain taxes, the Exchanger must reinvest
all exchange proceeds and either acquire property with equal or greater debt or
reinvest additional cash equal to the debt relief. The following worksheet is a
useful tool for determining the amount of cash and debt that should go into the
replacement property.

RELINQUISHED PROPERTY

Example

Sale Price:

$400,000

Minus Existing Loans:

$150,000

Minus Exchange Expenses:

$25,000

Equals Net Proceeds:

$225,000

REPLACEMENT PROPERTY

Example

Purchase Price:

$600,000

Minus New Loans:

$375,000

Equals Minimum Down:

$225,000

Your minimum down payment for the replacement property should be equal to or greater
than the net proceeds from the sale of your relinquished property. Otherwise, you
may have boot in the form of cash.

1

Applicable capital gains rates are as follows:

The applicable Federal capital gains rate may be 15% or 20% depending on your income and filing status.

Plus, the 3.8% medicare surtax as follows:

If your AGI is above the threshold amounts specified in IRC §1411, you will
pay 3.8% surtax on either your net investment income or your excess AGI over the
specified threshold – whichever is less.